Understanding Tariffs, Customs and FT zones for Brazil

Scenario in Brazil
The eyes of the world were on the so-called BRICs (Brazil, Russia, India,China) in 2007s . In
many ways, Brazil’s economy was one of the most promising markets across the globe.
Inflation was under control and millions of Brazilians were being propelled into a growing
middle class. Brazil’s largest stock exchange, Bovespa, located in São Paulo, was one of the
best performing exchanges in the world and Brazil had been awarded “investment grade”
status by Standard & Poor’s.

Market Attractiveness
Snapshot :- Size of the country 8,511,965 square kilometers ; Population 197 million people
in 2010; Brazil Currency Real ; Average exchange rate in 2009 US$ 1.74 = 1 Real
Ratings / Outlook:- EIU’s Sovereign Risk Rating (June 2010) BB ; Standard & Poor’s Foreign
Currency Risk Rating BBB+; Ease of Doing Business Rank (2010) 129; Rigidity of
Employment Index (2010) 46
The North and Northeast are the underdeveloped regions of the country. Most industrial
and commercial activities are concentrated in the South and Southeast regions. To reduce
social tensions resulting from these regional inequalities in economic development, the
government has allocated substantial resources, either directly or through tax incentives, to
northern and northeastern economic development during the past forty years.
Nevertheless, the practical result of this policy has been far less fruitful than expected.
Despite Brazil’s vast territory, 80% of its population lives in urban areas (the metropolitan
regions of São Paulo and Rio de Janeiro have populations of around 18 and 10 million
respectively).

Government policy
Government policy is focused on stimulating the business activities of the private and
government sectors toward rapid industrialization and economic growth. However, this
policy includes some protective measures for domestic industries considered to be of
strategic economic importance, as well as monetary policies designed to keep inflation in
check and maintain the availability of foreign exchange.. Brazil’s GDP in 2009, was R$ 3.14
trillion (approximately US$ 1.80 trillion at the exchange rate in force on Dec 31, 2009). 10 -
Developing a Market Entry Strategy for Brazil The trade surplus for 2009 was US$ 25.3
billion. This surplus is basically attributed to the important number of export and import
transactions, respectively, US$ 153.0 billion and US$ 127.7 billion. At the date of this
publication, Brazil had more than enough foreign exchange and private credits abroad to
settle all foreign public and private debt. No doubt this was important in Standard & Poor’s
and Fitch Ratings’ decision to raise Brazil’s rating to “Investment Grade”
OTHER FACTORS AND DRIVERS

 Driven by a maturing population, infrastructure investment and stable financial

environment, GDP is expected to grow 4.6% per year over 2007.
 In line with this growth, personal disposable income was expected to grow at a rate of
1.5% and unemployment is expected to decline at a rate of 3.0%.
 Private Lowercase Consumption was expected to average 7.8% annually, outpacing
expected inflation which is estimated to be 4.5%.
 The 21% CAGR growth of foreign direct investment over the past 5 years showed a
growing international interest in Brazil.
 The “demographic bonus” will be a result of a reduction in birth rates. The base of
people up to 14 years of age is getting narrower. At the same time, the productive
bracket (15-64) was expanding.
Given Brazil’s prominence on the international stage and strong underlying fundamentals,
it is no surprise that many companies were considering expanding into the Brazilian
market. Although the country presented many reasons that justified its position as a strong
market, the entry does require research and planning.
On the other hand, there were significant tax incentives available, ranging from those
related to the geographical location of the investmet (e.g., North and Northeast regions) to
others more industry-focused, such as those associated to infrastructure and oil & gas.
Therefore, planning the potential investment from a tax perspective is essential for the
success of the enterprise

Main corporate taxes in Brazil

Income Tax 25% ; Import Tax Variable Social Contribution 9% or 15% ; WHT 15% or 25% ; PIS
and COFINS 9.25% or 3.65%; CIDE 10% IPI (Federal VAT) Variable IOF tax Variable ICMS
(State Vat) Variable ISS 2% to 5%

STEP BY STEP Process followed by TCS in the survey for Brazil Decision
1. As a first step, TCS performed an in-depth evaluation of the market size, the
inherent growth oppotunities in the immediate future and the relevant growth
drivers in this geography.
2. Next, TCS performed a broad industry and customer survey with interviewees raging
from subject matter experts such as market analysts and trade association leaders to
industry participants such as contractors,software architects, and development
center owners.
3. Lastly, TCS extracted sensitive competitor information to generate an in-depth
competitive landscape with rich company profiles via an extensive interview
program of competing companies available for joint venture that were
subsequently validated through third-party research
MODE OF ENTRY BY TCS INTO BRAZIL
As per the quote of TCS company officials :
"We are clear that we do not want this to function as a near shore centre. We are
addressing the local customer as well as the multinationals that are our customers and
have a large presence here. For this, we have a local sales and marketing team, local
leadership and everything.
Brazil's demand for IT services is largely fuelled by the country's rapid growth; it saw its GDP
rise over 7% in the last calendar year. While some industry estimates peg the size of the
domestic IT services market at $10 billion, IT firms say the size is closer to $1516 billion,
including BPO and application services. According to Anthony Miller, an analyst at Tech
Market View, this is larger than the domestic markets of both India and China worth $4.2
billion and $5.7 billion, respectively, and expected to grow at doubledigit rates
Manufacturing, retail and egovernance also provide significant opportunity. The Brazilian
government has leveraged IT for some large projects like the electronic voting system,
internetbased tax filing and electronic procurement system.
Enterprise applications, IT infrastructure management, manufacturing and retail are some of
the areas that are leading to increasing demand. Brazil also has a large pool of IT services
professionals, from a total population of 200 million, almost 1.5 million people are engaged
in IT services. TCS has the largest presence amongst Indian companies in the Brazilian
market with almost 1,000 employees and though the company saw some impact due to the
recession it known to be emerging as one of the large players. Business from the country
though comes with its own set of challenges. The Brazilian government taxes import of IT
services heavily, making them at least 4050% more expensive to import than to do them
locally. This takes away the advantage of shifting work to a cheaper location like India.
Indian players are also competing with well established local players who already have a
significant share of the market. IBM has the largest share of the local IT market in Brazil,
followed by Accenture and HP.
In 2002, TCS had ventured into the high-growth Brazilian market by forming TCS do Brasil
through a 51:49 joint venture with Grupo TBA. TCS do Brasil is an IT services company
with delivery centres in the Brazilian cities of Sao Paulo and Brasilia. It provides services to
over 30 clients including ABN Amro, Goodyear, Equifax and Brasil Telecom.

For the year ended March 31, 2007, TCS do Brasil recorded revenues of $ 66.5 million (Rs
272.65 crore) and employed over 1,700 persons. (TCS) has gained complete control of the
Brazil-based joint venture company `TCS do Brasil' by acquiring its partner Grupo TBA's 49
per cent stake for $33.4 million (Rs 137 crore).In doing so, the Mumbai-based TCS's stake
in the erstwhile joint venture has gone up to 100 per cent from 51 per cent, said a news
release from the company.
In the synergistic relationship, Grupo TBA bought local market knowledge and client
relationships, while TCS contributed world-class methodologies process and quality systems.

Over the last five years, TCS do Brasil has been successful in scaling its business, achieving
market penetration and enhancing delivery capabilities, thereby resulting in a high level of
customer satisfaction. TCS has over 89,000 trained IT consultants in 47 countries.

The company has generated consolidated revenues of $4.3 billion for the year ended March
31, 2007.The Sao Paulo centre was set up last year to execute part of the $200-million
outsourcing deal with ABN Amro.
TCS do Brasil was the first company in Brazil to achieve the CMMI Level 5 certification, the
highest quality standard in the industry.TCS operations in Portugal are supported by the two
centres in Brazil. The global development centre in Uruguay looks after the operations in
Spain and Mexico. The Uruguay unit caters to clients across Latin America, Europe and the
US.TCS also carried out extensive recruitment in Argentina for its Uruguay centre to
strengthen its South America operations.

Meanwhile, Grupo TBA and TCS have signed a co-operation pact. According to the
agreement, the two will continue to jointly service clients. TCS also reportedly invested $1.5
million (Brazilian Reais) in training and recruitment in Brazil. It also formed alliances with
educational institutes such as University Sao Paulo.

One thing above all stood out about the TCS Brazil business model. Although it adheres to
TCS’s global service delivery processes and methodologies, it is to all intents and purposes
an entirely ‘onshore’ operation; no work is offshored to India and few Indians are brought
in to work on Brazilian projects. There are good reasons for this. For one thing, although
Brazilian IT wage costs are among the highest in the region, well above Indian levels,
government taxes on imported services eat into the cost differential, giving little leverage
for wage arbitrage. Secondly, it’s the language; there are not that many Indians (outside
of Goa, I suppose) that can speak fluent Portuguese, and English is not yet widely spoken
in Brazil, especially in domestic enterprises.

This puts TCS on a level playing field with archrivals Accenture, IBM, and European players
such as Capgemini and Atos. Without offshore leverage, TCS has to match capability as well
as cost. It appears to be able to do this for the service lines and sectors in which it chooses
to operate. What TCS doesn’t yet have is the brand value that multinational rivals enjoy, and
this is perhaps Castelli’s biggest challenge – to prove that TCS Brazil is every bit as
competent and competitive as Accenture Brazil or IBM Brazil – and indeed, every bit as
Brazilian! Perhaps not surprisingly, few other Indian SIs have tried to break into the Brazilian
market. Brazil is aiming to become a top offshore outsourcing destination
The company has generated consolidated revenues of $4.3 billion for the year ended March 31,
2007.The Sao Paulo centre was set up last year to execute part of the $200-million outsourcing deal
with ABN Amro.TCS do Brasil was the first company in Brazil to achieve the CMMI Level 5
certification, the highest quality standard in the industry.TCS operations in Portugal are supported
by the two centres in Brazil. The global development centre in Uruguay looks after the operations in
Spain and Mexico. The Uruguay unit caters to clients across Latin America, Europe and the US.TCS
also carried out extensive recruitment in Argentina for its Uruguay centre to strengthen its South
America operations.

In the synergistic relationship, Grupo TBA bought local market knowledge and client
relationships, while TCS contributed world-class methodologies process and quality systems.
Over the last five years, TCS do Brasil has been successful in scaling its business, achieving
market penetration and enhancing delivery capabilities, thereby resulting in a high level of
customer satisfaction. TCS has over 89,000 trained IT consultants in 47 countries.
The company has generated consolidated revenues of $4.3 billion for the year ended March
31, 2007.The Sao Paulo centre was set up last year to execute part of the $200-million
outsourcing deal with ABN Amro.
TCS do Brasil was the first company in Brazil to achieve the CMMI Level 5 certification, the
highest quality standard in the industry.TCS operations in Portugal are supported by the two
centres in Brazil. The global development centre in Uruguay looks after the operations in
Spain and Mexico. The Uruguay unit caters to clients across Latin America, Europe and the
US.TCS also carried out extensive recruitment in Argentina for its Uruguay centre to
strengthen its South America operations.